Public Interest

Despite the near collapse of the economy this year, the main Wall Street players in that drama have continued to pay themselves huge bonuses as if nothing had happened. The difference this time, arguably, is that if millions of taxpayers (some of whom are now unemployed) had not come to Wall Street's rescue in 2008 and 2009, there wouldn't be any bonuses to speak of. Can this hubris be explained?

One explanation is that the corporations involved are doing what they were designed to do--make money. If the fiduciary duty of the boards and their managers is to make money, they will make it in the most efficient way possible. That is why the big banks prefer to make massive profits from trading, some of it highly risky, rather than by lending to needy businesses that would then be able to hire back laid-off employees or even create new jobs. They call it maximizing shareholder value. The problem is that if this keeps up, the system will reach the brink of another collapse.

In theory, there is a better way. Corporations were created by states to serve the public interest, usually to build a road or dig a canal, in exchange for which they were granted the permission to organize and given limited liability. The duty to serve the broader society is still on the books, but it has atrophied. Since the rise of gigantic business enterprises there has been commentary on the amorality of corporations focusing on shareholder value to the exclusion of everything else. The businessmen say, "Fine, but who is going to define the public interest for us? Who is going to tell us when a profit becomes an excess profit? You can't legislate compassion."

Unfortunately, they have a point. Up to now we've relied on the self-correcting market and disclosure to provide so-called "perfect knowledge" for investors. Even if those mechanisms worked perfectly, they still would not necessarily serve the public interest, or in recent usage, the taxpayers' interest. They would only make money-making more honest.

How then, to inject a bit of responsibility, compassion, public interest or even morality into the system? You would think the non-profit and charitable sector could provide an answer. It consists of thousands of large (and small) corporations controlling at least a trillion dollars of assets. It is a significant factor in the economy, and even though most of it enjoys an exemption from paying taxes that any beleaguered taxpayer would drool over, it does not generate the vitriol we've seen directed at Wall Street.

That is because the sector is designed to serve society at large. We call this a mission-driven purpose. We feed the hungry, house the homeless, educate the ignorant. Those kinds of purposes rarely generate resentment. There is not much debate about what the public interest is because we define it ourselves in the mission statements. The Congress set the basic rules for tax exemptions and empowered the IRS to enforce those rules. True, there is argument from time to time over what is and what is not tax-exempt activity, but basically the system works. Why, then, can't we tweak the system a bit and apply it to Wall Street?

Before we do that, we need to take a closer look at the non-profit sector. Clearly, the mission-driven approach of the charities works well. Of the many scandals plaguing us in recent years, few if any were rooted in a non-profit's failure to do what it was designed to do. The failures were almost always human--usually the greed of executives or the laxity of boards. The hospital might still provide charity care, for example, but the boss is getting an outrageous salary, a chauffered limo and a live-in chef.

It sounds like Wall Street in miniature. It appears us do-gooders don't have a cure for what ails us, much less them.